BASIC MICROECONOMICS

Poverty and Economic

Inequality
PRAYER
CHECKING OF ATTENDANCE
QUICK REVIEW
Externalities
 The effect of a market exchange on a third party
who is outside or “external” to the exchange.
 There are EXTERNAL benefits or external costs
to someone other than the original decision
maker.
 Sometimes called as spillover
Kinds of Externalities
1. Positive Externality
- exists if the production and consumption of a
good or service benefits a third party not directly
involved in the market transaction.
2. Negative Externality
- occur when the consumption or production of a
good causes a harmful effect to a third party.
 Externalities by nature are generally
environmental, such as natural resources or public
health. For example, a negative externality is a
business that causes pollution that diminishes the
property values or health of people in the
surrounding area.
 A positive externality includes actions that reduce
transmission of disease or avoids the use of lawn
treatments that runoff to rivers and thus contribute
to excess plant growth in lakes.
Learning Objectives:
At the end of this lesson, the students will be able to:
 Define poverty line, poverty trap and safety net.
 Explain why income inequality exist.
 Give example of government projects to reduce
poverty.
Motivation:

What would you rather be?

Rich in poor country

Or
Poor in rich country
 Income Inequality and
Poverty

A person’s earnings depend on the supply and

demand for that person’s labor, which in turn
depend on natural ability, human capital,
compensating differentials, discrimination, and so
on.

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Income Inequality

• Imagine that you. . .

• lined up all of the families in the economy
according to their annual income.
• divided the families into five equal groups (bottom
fifth, second fifth, etc.)
• computed the share of total income that each group
of families received.

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What is poverty?
What is poverty?
Poverty is a state or condition in which a person
or community lacks the financial resources and
essentials for a minimum standard of living.
Types of poverty?
1. Absolute poverty.
2. Relative Poverty.
3. Situational Poverty.
4. Generational Poverty.
5. Rural Poverty.
6. Urban Poverty.
Absolute poverty:
 Also known as extreme poverty or abject
poverty, it involves the scarcity of basic food,
clean water, health, shelter, education and
information.
 Those who belong to absolute poverty tend to
struggle to live and experience a lot of child
deaths from preventable diseases like malaria,
cholera and water-contamination related
diseases.
Relative Poverty
 It is defined from the social perspective that is
living standard compared to the economic
standards of population living in
surroundings. Hence it is a measure of
income inequality.
 For example, a family can be considered poor
if it cannot afford vacations, or cannot buy
presents for children at Christmas, or cannot
send its young to the university.
Situational Poverty:
It is a temporary type of poverty based on
occurrence of an adverse event like
environmental disaster, job loss and severe
health problem. People can help themselves even
with a small assistance, as the poverty comes
because of unfortunate event.
Generational Poverty:
It is handed over to individual and families from
one generation to the one. This is more
complicated as there is no escape because the
people are trapped in its cause and unable to
access the tools required to get out of it.
Rural Poverty:
 It occurs in rural areas with population below
50,000. It is the area where there are less job
opportunities, less access to services, less
support for disabilities and quality education
opportunities.
 People are tending to live mostly on the
farming and other menial work available to
the surroundings.
Urban Poverty: 
It occurs in the metropolitan areas with
population over 50,000. These are some major
challenges faced by the Urban Poor:

 Limited access to health and education.

 Inadequate housing and services.
 Violent and unhealthy environment because
of overcrowding.
 Little or no social protection mechanism.
Income Inequality

• Reasons for Recent Increase in Income

Inequality
• The following have tended to reduce the demand for
unskilled labor and raise the demand for skilled
labor:
• Increases in international trade with low-wage countries
• Changes in technology
• Therefore, the wages of unskilled workers have
fallen relative to the wages of skilled workers.
• This has resulted in increased inequality in family
incomes.
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The Poverty Rate

• The poverty rate is the percentage of the

population whose family income falls below an
absolute level called the poverty line.

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Problems in Measuring Inequality

• The Poverty Line

• The poverty line is an absolute level of income set
by the federal government for each family size
below which a family is deemed to be in poverty.

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Who are identified rich, poor?
Philippine Institute for Development Studies
(PIDS) -https://news.abs-cbn.com/news/09/17/20
Poor: Below P10,957 monthly income
Low-income but not poor: P10,957 to P21,914 monthly
income
Lower middle: P21,914 to P43,828 monthly income
Middle: P43,828 to P76,66 monthly income
Upper middle: P76,669 to P131,484 monthly income
Upper middle but not rich: P131,483 to P219,140 monthly
income
Rich: P219,140 and above monthly income
How many poor families are in the Philippines
in 2020?

According to their data, the percentage of

Filipinos who were involuntarily hungry in May
2020 (16.7% or 4.2 million families) almost
doubled since December 2019 (8.8% or around
2.1 million families). This is the highest the
number has been since September 2014 (22.8%
or 4.8 million families).Jul 2, 2020
Problems in Measuring Inequality

• The Poverty Line and Income Inequality

• Despite continued economic growth in

average income, the poverty rate has not
declined.

• Although economic growth has raised the income

of the typical family, the increase in inequality has
prevented the poorest families from sharing in
this greater economic prosperity.
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Problems in Measuring Inequality

• Three Facts About Poverty

• Poverty is correlated with race.
• Poverty is correlated with age.
• Poverty is correlated with family composition.

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Problems in Measuring Inequality

• Data on income distribution and the poverty

rate give an incomplete picture of inequality in
living standards because of the following:
• In-kind transfers
• Life cycle
• Transitory
versus
permanent
income

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Problems in Measuring Inequality

• In-Kind Transfers
• Transfers to the poor given in the form of goods and
services rather than cash are called in-kind
transfers.
• Measurements of the distribution of income and the
poverty rate are based on families’ money income.
• The failure to include in-kind transfers as part of
income greatly affects the measured poverty rate.

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Problems in Measuring Inequality

• The Economic Life Cycle

• The regular pattern of income variation over a
person’s life is called the life cycle.
• A young worker has a low income at the beginning of his
or her career.
• Income rises as the worker gains maturity and
experience.
• Income peaks at about age 50.
• Income falls sharply at retirement, around age
65.

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Problems in Measuring Inequality

• Transitory versus Permanent Income

• Incomes vary because of random and transitory
forces.
• Acts of nature
• Temporary layoffs due to illness or economic conditions,
etc.
• A family’s ability to buy goods and services depends
largely on its permanent income, which is its normal, or
average, income.
• Permanent income excludes transitory changes in
income.

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Economic Mobility

• The movement of people among income

classes is called economic mobility.

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Economic Mobility

• Movements up and down the income ladder can

be due to:
• Good or bad luck.
• Hard work or laziness.
• Persistence of economic success from generation to
generation.

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POLICIES TO REDUCE POVERTY
• Minimum-wage laws
• Welfare
• Negative income tax
• In-kind transfers

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Minimum-Wage Laws

• Advocates view the minimum wage as a way of

helping the working poor.
• Critics view the minimum wage as hurting
those it is intended to help.

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Minimum-Wage Laws

• The magnitude of the effects of the minimum

wage depends on the elasticity of the
demand for labor.

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Minimum-Wage Laws

• Advocates argue that the demand for unskilled

labor is relatively inelastic, so that a high
minimum wage depresses employment only
slightly.
• Critics argue that labor demand is more elastic,
especially in the long run when firms can adjust
employment more fully.

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Welfare

• The government attempts to raise the living

standards of the poor through the welfare
system.
• Welfare is a broad term that encompasses
various government programs that
supplement the incomes of the needy.
• Temporary Assistance for Needy Families (TANF)
• Supplemental Security Income (SSI)

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Negative Income Tax

• A negative income tax collects tax revenue

from high-income households and gives
transfers to low-income households.

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Negative Income Tax

• High-income families would pay a tax based

on their incomes.
• Low-income families would receive a subsidy
—a “negative tax.”
• Poor families would receive financial assistance
without having to demonstrate need.

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In-Kind Transfers

• In-kind transfers are transfers to the poor given

in the form of goods and services rather than
cash.
• Food stamps and Medicaid are examples.

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In-Kind Transfers

• Advocates of in-kind transfers argue that such

transfers ensure that the poor get what they
most need.
• Advocates of cash payments argue that in-kind
transfers are inefficient and disrespectful.

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The Poverty Trap

A poverty trap occurs when government-support

payments for the poor decline as the poor earn more
income. As a result, the poor do not end up with
much more income when they work, because the loss
of government support largely or completely offsets
any income that one earns by working. Phasing out
government benefits more slowly, as well as
imposing requirements for work as a condition of
receiving benefits and a time limit on benefits can
reduce the harshness of the poverty trap.
The Safety Net
We call the group of government programs that assist
the poor the safety net. Safety nets can reduce
inequality and poverty; encourage investments that
increase household income; reduce individuals’ need
to sell vital assets when disaster strikes; and lessen the
likelihood that vulnerable persons suffer catastrophic
losses that leave them chronically poor. Governments
can also design safety nets to incentivize socially
desirable behaviors, such as sending children to school
or visiting a doctor or helping rehabilitate
infrastructure damaged by natural disaster.
 Government programs for poverty in the
Philippines
 Pantawid Pamilyang Pilipino Program (CCT)
 K to 12 Basic Education.
 Responsible Parenthood.(Birth Control)
 Sin Taxes.
Is the government approach in solving
poverty in the Philippines enough?

The goal for the Philippine government is to

create more jobs, improve productivity, invest
in health and nutrition while focusing on
reducing poverty. If the government is able to
execute its plans successfully, it is capable of
reducing poverty in the Philippines by 13 to
15 percent by 2022.
EVALUATION
ASSIGNMENT